Dear Mr. Bezos

Dear Mr. Bezos,

I fear you may be working on the wrong problem.

I placed an order for three umbrellas and some pet stain remover last Friday. It’s been raining a lot here in Chicago, and my dog has suddenly started mistaking my basement carpet for my neighbor’s yard, even though one is lush and green and the other is brown, stubby, and smells like polyester and those fluorescent orange cheese crackers.

I placed the order at 10:06 a.m. At 7:00 a.m. the next morning, on my way out to retrieve my newspaper, I nearly tripped on your Amazon Prime box that had somehow miraculously appeared on my doorstep.

Holy Supply Chain! The Santa Claus of my youth couldn’t have worked with such stealth and efficiency. And did I mention that the Friday on which I placed the order was Black Friday? The same Black Friday that crushed the Neiman Marcus site for hours at a time?

Clearly the tens of billions you’ve been investing in warehouses and systems are paying off. Either that, or the Mephistophelian bargain you made back at the Albuquerque crossroads continues to shower you with good fortune. Now that I think about it, it must be the latter–only the Devil is willing to work so hard on the day after Thanksgiving.

Anyway, you’re doing a hell of a job. But I do have one little thing I would like to point out: I don’t think I need to get my stuff that quickly. Sure, it was nice, but I think I would have been just as happy to get my pet stain remover on Tuesday.

So before you squeeze that delivery time down to hours or minutes, let me propose that you look into a bigger problem I have with your service:

What am I supposed to do with all this #%$&!* cardboard?

The picture at the top of this post is just one week’s worth of boxes delivered to my house (from Amazon and others.) I admit my family may not be normal, as we have the same aversion to shopping in stores as Donald Trump has to historical facts. But nonetheless, this will be everyone’s problem if your company continues to grow at the pace you’re planning.

It’s a serious pain to break down all these boxes and then bribe the recycling guy to take more than my allotted quota each week, but it’s an even bigger deal than that. It’s wasteful! Is there a greater sin in these times? With each box’s arrival, I feel like a Roman aristocrat eating peeled-by-eunuchs grapes as the Visigoths crawl over the gates.

Shame on me. And shame on you.

Ignore Your Customers on These Four Occasions

Listen to your customers.  This advice is so old and so sacrosanct that I suspect Jesus used it while managing the apostles.

“Hey team, we just received a parchment survey from a very upset customer.  Apparently, at that last Sea of Galilee event, we were not getting those baskets of fish and loaves out fast enough.  Let’s sharpen our focus, people!  Leperpalooza is just around the corner and we need to be on our game!”  

The logic behind listening to your customers is blindingly obvious, so unlike the typical business book, I am not going to spend three thousand words trying to convince you it’s a good idea.  Instead, I would like to argue that in some situations, you should not follow this advice.

Here are four scenarios in which you’re better off consulting a clairvoyant than listening to your customers:

1.  Don’t ask your customers about anything related to money

First of all, never give customers the option in a focus group or on a survey to tell you your product should be cheaper. Their answer will always be yes.

Furthermore, don’t ask them to compare the price to other facets of your product.  If you give them a list of features or benefits and ask what they value most, they will consistently pick price first.  Even hedge fund managers talking about their mink-lined underpants will claim that price is most important to them.

And in the name of all that is holy, whatever you do, don’t ask them to tell you how much you should charge for the product.  The answer they give will have no relation to what they will actually pay.

Why are customers such unreliable guides in this area?  I don’t know, but here’s my speculation:

First, we are asking customers to cooly and rationally project what they will do, when spending money is instead an emotional, visceral action.  Few customers would ever predict that they would spend $1000 on a handbag, or $500 for an Oak Ridge Boys concert ticket.  But in the real world, these things happen all the time.

Secondly, most of us spend our entire lives being price takers.  This can make us feel powerless.  Participating in a survey may feel like a chance to finally stick up one’s middle finger at the powerful price setters.   Take that you monopolistic #&@$!

If you want accurate guidance on how much you can charge for your product, there’s only one reliable way to get it.  Put your product into the market at your favored price and see if customers are willing to pay it.

2. Don’t ask your customers about their vices or virtues

Many psychological studies have demonstrated that the vast majority of us think we’re better than average, whether it’s our attractiveness to the opposite sex or our ability to safely pilot a car.  I call this LWS–Lake Wobegone Syndrome.

This is why, if you’re anything like me, you are shocked every time you look in the mirror.  “Who the hell is that guy?” my internal voice screams.  The cold, uncompromising reality of the mirror clashes violently with my Adonis-like self image.  Where did my hair go?  Where are my rippled biceps?  And for some reason I am completely surprised every time, even though I looked into that same heartless mirror one short day ago.

Perhaps there’s an evolutionary advantage to this constant self-delusion.  Maybe believing we could outrun that lion saved some of us on the Serengeti thousands of years ago, giving us the confidence necessary to shave a few tenths of a second off our two-hundred-meter sprint times.  I don’t know.

Whatever the reason, LWS is very real and will show up anytime you ask customers to predict their behavior in ways that threaten or enhance their self image.

For example, everyone wants to believe they’re being responsible stewards of this planet–even coal company executives.  Several years ago, in the early days of environmental awareness, a paper goods manufacturer asked consumers if they would buy towels made from recycled paper, even if the quality of the product was a bit reduced.   The vast majority said yes–enthusiastically.  In fact, they said they would even pay a bit more because it was the right thing to do. Far be it from them to continue pillaging our forests just so they could avoid the inconvenience of washing a rag.

Using this research, the company launched a line of paper towels manufactured from recycled paper.  The quality was a bit less and the price a few cents higher than their conventional towels.  The results?  You guessed it.  The recycled towels collected dust on store shelves.

Please don’t misunderstand me.  I’m not saying people will never buy environmentally-friendly products.  I’m just saying that more people will predict they will buy them than actually will, even in this age of Teslas and organic house paint.

So people will overestimate their virtues, but what about their vices?  Well, let me ask you this:  How accurately will people estimate the number of hours they spend watching TV each day?  Or how many calories they consume?  Or how often they let their kids eat Pop-Tarts for breakfast?

You know the answer of course.  Customers will very consistently underestimate how often they commit these sins.  To do otherwise would defile their self image.

Listening to customers too closely in these kinds of cases can cause you to overlook lucrative business opportunities.

3. Don’t ask your customers what new products or services you should create for them

First of all, this is not their job, it’s yours.  And because it’s not their job, they haven’t been thinking about it.  So when you start interrogating them in a focus group, their answer is generally going to be some form of, “I don’t know.”

But even if they were thinking about it, they would have a hard time helping you imagine products beyond mildly improved versions of what they currently use. They, like the rest of us, are trapped in their current context.

There’s an old Henry Ford quote that goes something like, “If I had asked my customers what they wanted, they would have said faster horses.”  He probably didn’t say it, like most quotes you find on the Internet, but it nicely illustrates the point.

Great leaps forward in technology (cars, mobile phones, the Internet) are obvious examples of products that could never emerge from customer conversations.  But as Clayton Christensen illustrated in his The Innovator’s Dilemma, even modestly new products or technologies can be met with skepticism by customers.  Only innovations that offer more performance on today’s axes of utility will be greeted enthusiastically (e.g. bigger televisions with sharper images; chocolate chip cookies with more chips; etc.)  Do we really need to ask customers whether or not they would prefer more of something they already like?

4. Don’t ask your customers why they do what they do

There are exceptions to this rule.  Exceptionally gifted qualitative researchers, with the right research subjects and some luck, can sometimes pull this off.

And it’s often worth trying, for if you can figure out why people do what they do, it can be powerfully useful.

But generally, people don’t know why they do what they do.  They either literally can’t articulate the reasons, or the rational part of their brain deceives them and claims credit for the things the emotional part is controlling.  Dan Kahneman refers to this as the man riding the elephant.  The man (your rational brain) thinks he’s really in control, but the elephant (your emotional brain) can actually decide to do whatever it wants to.

On the rare occasions when customers truly understand what’s going on in their head, there are often good reasons why they don’t want to be honest about it, either for the reasons cited above (vices or virtues that challenge their self image) or for the simple reason that they may find it uncomfortable to reveal it to strangers.

So go forth and listen to your customers, just as the old adage suggests.  Just do so carefully!

6.9% Growth in China and Other Fairy Tales

The Chinese government announced yesterday that its GDP grew 6.9% in the third quarter, a smidge less than its goal of 7%.

Right. And Osama bin Laden is alive right now, sitting poolside at the Bellagio, quaffing Tanqueray and Tonics as fast as the barman can set them up.

I am not the only one who is skeptical. The Internet is awash with skeptics. Seven percent annual growth is very difficult to reconcile with other economic indicators coming out of China. Little things, like a Shanghai Stock Exchange index that’s down 35% from its peak. Or a dramatic drop in Chinese dollar-denominated imports (down 15% to 20% every month since February.) Or massive capital flight ($150 billion poured out of China in the month of August alone.)

Some people seem to take great offense to this skepticism, as if the critics are heretics who are unwilling to believe in China’s economic miracle.

But this seems silly. You don’t have to doubt the legitimacy or endurance of China’s long-term growth to be skeptical about the country’s recent performance. You really only need to believe in two things.

The Business Cycle

First, you have to believe in the inevitability of the business cycle. Before deciding what you believe, just remember that no country in recorded history has escaped occasional downturns. It happens to the best of us. For reasons economists still can’t explain with complete clarity, recessions come along every once in a while and spoil the party.

The last guy to claim he had figured out how to eliminate downturns was Alan Greenspan with his Great Moderation. As you’ll remember, the Great Moderation was followed by another Great event that didn’t feel all that great to most of us.

Perhaps the best, recent historical analog to what China is going through is the United States in the late 19th century, when we grew from a modest player on the world’s economic stage to a global hegemon. Between 1870 and 1910, we suffered ten downturns, most of which were called a “Panic” of some sort.

China has experienced over thirty years of nearly uninterrupted growth. They have very smartly steered their development policies to create tremendous wealth, lifting half a billion people out of poverty. Unfortunately, none of that insulates them from a recession.

The Distortion of Information in Hierarchies

The second phenomenon you have to believe in is the predictable distortion of information in hierarchical systems.

Part of why the believers in China’s stated growth numbers believe is because they have a hard time imagining top Chinese officials deliberately lying about what’s happening.

I agree. I don’t think China’s leaders are purposely distorting their GDP figures.

But that doesn’t mean the numbers are true. It just means that China’s leadership believes the numbers are true.

Is it really so hard to believe that the leaders in the Chinese Communist Party may be receiving less-than-accurate information from the countless bureaucratic layers below them?

Powerful hierarchies produce lies because they produce fear. Every participant in the system shades the truth to their boss as much as they can. The Soviet Union experienced “record harvests” nearly every year until the fantasy could no longer be reconciled with the reality of empty grocery store shelves.

Even though Uncle Jinping can’t hold a candle to Uncle Joe’s despotism, China still executes over 2000 people a year. Some of those people are government officials. Knowing that, might a state-owned factory manager who has been diverting a few Yuan into his own pockets be tempted to inflate his reported revenues a bit?

But you don’t need to be literally afraid for your life to be motivated to enhance the truth for your boss. The stakes in nearly every job are high, even if you’re a low-level manager at an ordinary company. Your boss’s perception of you can affect your career prospects, your prestige with your peers, and your family’s livelihood. So small lies get created. And they accumulate as each layer of the bureaucracy adds its own lies to the pile.

Where’s the CEO in all this? Or Mr. Xi? Clueless. As far as they know, everything is fine. Their ability to know the truth is completely obscured by the distorting effects of the hierarchy. And that distortion increases as a function of the organization’s size and the power it has over its members.

So yes, I am a skeptic on China’s third quarter growth. I believe China is already in a recession, and the last guy in the country to know the truth about it will be Xi Jinping.

Why Your Next Car Won’t Be A Tesla

Last week, at a PR event shamelessly modeled after Steve Jobs’ finest, Tesla announced the arrival of its new Model X sport utility vehicle (pictured above.) The Model X will start at $132,000.

In case you were wondering, here’s what else you can buy for $132,000:

  • A Maserati Granturismo Sport Coupe with Bianco Eldorado painted coachwork and a Rosso Corallo leather interior. Bellissimo!
  • A Peterbilt 386 Sleeper Truck with an 80” cab, a 10-speeds, 500 horsepower, and 1650 foot pounds of torque. Yeehaw!
  • An average home in Greensboro, North Carolina.

Elon Musk and his team are diving into a thin market for $130,000+ SUVs. One of the few models that can reach such nosebleed heights, the Mercedes Benz G63 AMG, only sells about 500 units per year in the U.S.

But perhaps today’s volumes are not indicative of where this market is going and Tesla is correct to go after it. After all, Bentley will be introducing an SUV in 2016. It will be called the “Bentayga.” I’m not kidding.

Anyway, maybe the world is full of more venture capitalists and Russian mobsters than I think. Maybe Tesla will sell as many Model X SUVs as they do Model S cars. That would double Tesla’s annual volume to 100,000 units, or roughly the same number of cars that Toyota, Volkswagen, and General Motors each produce every four days.

Who cares about how many cars Tesla produces? Well, you should. That is if you believe that converting to electric cars is one of the ways we’re going to keep this planet from becoming one large Swedish sauna (a debatable point we’ll table for another time.)

The biggest engineering problem automakers have to overcome to make electric cars compelling is the energy density of today’s battery technology. A gallon of gasoline has an energy density of 33.7 kWH, according to the all-knowing Google. The General Motors EV1, introduced in 1996, used 1300 pounds of lead acid batteries to capture 16.5 kWH. In other words, it required nearly ¾ of a ton of batteries to deliver the same potential energy as a half-gallon of gasoline. You can see why range was a problem for the EV1.

Tesla has tackled this challenge by wiring together nearly 7000 lithium-ion laptop batteries into one big pack. Doing so allows the company to cram up to 90 kWH into its Model S sedans. These batteries are still heavy (1200 pounds) and quite expensive. How expensive? Tesla isn’t revealing that number, but most engineering-types and Internet cranks believe a reasonable estimate is around $25,000 (the base price for a Tesla Model S 85D with the 90 kWH upgrade is $88,000.)

A $25,000 battery pack prohibits the company from delivering a car that normal people can afford. The average price paid for a new vehicle in the United States in 2015 is $33,560. That doesn’t leave a lot of room for such luxuries as brakes and seats.

So the only way Tesla can make a margin on a vehicle with this technology is to move it up market. And it has done that successfully. The Model S is a brilliant sedan that has won an impressive array of awards, even from some of the most hardened electric-car cynics. I am amazed at what Tesla has done.

But even after Donald Trump becomes president and implements massive tax cuts for all, most of us won’t be able to afford $90,000 sedans and $130,000 SUVs. Teslas will remain niche luxury vehicles.

The company says otherwise, promising to introduce a long-talked-about Model 3 in 2017 that will start at $35,000. To do so will require a massive change in the economics of lithium-ion batteries. Tesla suggests that the $5-billion-dollar “Gigafactory” it’s building in the middle of the Nevada desert will do exactly that, churning out 500,000 battery packs every year at a not-so-massive savings of 30% per kWH.

Now I’m no engineer, but getting this all done by 2017 seems a tad aggressive. In fact, I think it’s more likely that we’ll see Bernie Sanders in the White House that year, riding a 90% approval rating after completing the nationalization of Hershey’s and Fruit of the Loom. Kisses and tighty whities for all!

Let me be clear. I am not betting against Elon Musk in the long run. Unlike many Silicon Valley billionaires, this guy isn’t just lucky. He’s the real deal. He makes Thomas Edison look like a piker. Nobody else could do what he’s doing with Tesla; much less also build space rockets in their spare time.

But I have to think there’s an easier and faster way to increase the adoption of fully electric vehicles. Nearly twenty years ago, I wrote a paper in business school predicting the innovation path for electric cars. Almost none of it has come true, which may help explain why I’m such a bitter man. Nonetheless, I continue to hope!

In that paper I suggested that car manufacturers consider adopting Clayton Christensen’s disruptive innovation model. Instead of trying to beat internal combustion at its own game (power and range), I recommended finding new markets where electric vehicles’ limited speed and range would be virtues.

My favorite example was a car aimed at parents with teenage drivers. For this target audience, the limited power and range of electric technology is a benefit!

My pimple-faced Johnny can drive no faster than 65 miles per hour? For about 80 miles on a charge? And he has to come home to recharge it?  Where do I sign up?! 

Such vehicles could be simple, cheap, and trackable via embedded GPS (an unimaginable feature when I wrote the paper.) To increase their appeal for the teenagers, they could feature a kick-ass stereo, customizable body panels, and Chipotle burrito holders.

With such modest performance requirements, the technology deployed could be simple. More importantly, prices could be cheap–perhaps less than $20,000.

With a low price and a benefit the target audience craves, how many units could be sold? Hundreds of thousands? Millions? And with that kind of volume, wouldn’t it be easier for Musk’s brilliant engineers to extract more efficiency out of this technology, finally making it competitive with internal combustion for the rest of the market?

But alas, I fear this won’t come to pass, so start saving up your nickels. You will need 2.6 million of them for your first Model X.

Five Telltale Signs Your Company’s Strategy Stinks

This article borrows heavily from Richard Rumelt’s book, Good Strategy/Bad Strategy, given to me by my friend, Joe Thacker. This is one of only three business books I recommend you read (most business books are only suitable for propping open windows with broken sash cords.)   The other two you must spend time with are Clayton Christensen’s The Innovator’s Dilemma and Sun Tzu’s The Art of War.

Actually, I’m just kidding about The Art of War.   That’s the book everyone recommends when they want to sound really sophisticated. Personally, I have never found any modern business meaning in Mr. Sun’s pearls of wisdom, such as this gem: “Be extremely subtle, even to the point of formlessness. Be extremely mysterious, even to the point of soundlessness.”

So that leaves us with just two. Mr. Christensen’s book is required reading, widely considered to be one of the seminal business works of the second half of the twentieth century. And Mr. Rumelt’s Good Strategy/Bad Strategy, despite its unimaginative title, should likewise join the petite canon of business literature.

Good Strategy/Bad Strategy is a Michelin-starred, seven-course tasting menu of brilliant insights.   What I’m about to serve here is a doggie bag full of his scraps, warmed up for you on a paper plate with a splotch of mustard on the side. If you find any of the following bits interesting, do yourself a favor and order his book.

Here’s my top five indicators of a suspect strategy:

1.  The strategy starts with a “vision” and a “mission.”

Do you know the difference between the two? Be honest now. Well, I certainly don’t. I do know one way in which they’re the same, though. Nobody in the organization can ever remember them.

This is a shame, because a “vission” (or “mision” if you prefer) is supposed to be there to inspire. How can people be inspired by something they don’t remember?

For a vission to inspire, it needs to be really, really good. And short. In practice, it’s rarely either, much less both.

Great, mission-driven organizations (e.g. the Mayo Clinic; the Red Cross; Harvard University; etc.) can stand for centuries. There’s something magical about such institutions, and corporations are right to try to mimic them.

But that magic is often rooted in authentic and meaningful missions that are deeply woven throughout those organizations’ histories. Let’s face it, most companies do unexciting work and have little hope of finding deeper meaning in what they do. Some stretch so far to make a tenuous connection to “improving lives” that the CEO must cringe every time she is forced to recite it.

“Jeff’s Plumbing, where our mission is to improve peoples’ lives by allowing them to relieve themselves whenever they need to.”

So why does nearly every corporate strategy document start with this kind of tripe? Rumelt explains that at some point in the last twenty years we became infatuated with the fantasy of charismatic, vision-led leadership, and that we started to confuse it with sound strategy work–a far less sexy concept. Great leaders have Vision, the movement reminded us, so you can’t ever hope to be the next Jack Welch unless you gather your team into a conference room and force them to agree on a vission in a single afternoon.

The implications, Rumelt says, are that this, “ . . . siren song of template-style strategy—filling in the blanks with vision, mission, values, and strategies . . . offers a one-size-fits-all substitute for the hard work of analysis and coordinated action.”

The inevitable product of this kind of process is insincere and uninspiring, causing employees to groan and roll their eyes anytime the CEO turns her back.

2.  The strategy uses lots of big words

Rumelt refers to them as “Sunday Words”, describing them as “inflated and abstruse.” It’s a bit ironic that he uses the adjective “abstruse,” which I had to look up (it means difficult to understand.)

Whether you use the term “Sunday Words,” or my favorite, “Fifty Cent Words,” we all know them when we see them.   They are especially nausea-inducing when they are trendy, recent additions to the sometimes nonsensical vocabulary of the business world, like “disintermediation,” or “omni-channel” or “employee engagement.”

Why is this necessary?   To prove that the people who created the strategy are smart? Wouldn’t it be better to use language that is simple and unambiguous? Wouldn’t an inspiring leader insist on that?

Rumelt writes, “A hallmark of true expertise and insight is making a complex subject understandable. A hallmark of mediocrity and bad strategy is unnecessary complexity–a flurry of fluff masking an absence of substance.”

3.  The strategy doesn’t define the problem that needs to be solved

This is the most important part of any strategy, yet most organizations skimp on it or skip it entirely. A strategy is a proposed solution. It has no meaning if the problem is not defined.

My first employer, General Mills, understood this. The annual planning process there always started (and still starts today, I suspect) with a presentation of “Key Issues,” the problems that prevented each business from growing at the desired pace.   We worked hardest and longest on this first stage of our strategy development because finding the actual causes of what ails a business is very difficult. It’s much easier to stop at the symptoms.

The benefit of all that hard work was that the solutions we prescribed would fall quite naturally out of the problems we defined. As Rumelt declares, “When you cannot define the challenge, you cannot evaluate a strategy or improve it. If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have either a stretch goal, a budget, or a list of things you wish would happen.”

4.  The strategy confuses objectives with strategy

I think we can blame the finance guys for this one. Strategy development in most companies starts with the board asking for multi-year projection of the business. This causes the CFO and his team to initiate a “strategic planning” process with the same enthusiasm that Chinese deep shaft coal miners feel when they enter the elevator cage each morning.

The strategy team, often an amalgam of cross-functional, mid-level management draftees who don’t have enough chits lying around to buy their way out of the assignment, will start with the numbers that the CFO wants in year five and work backwards. They will then, with as much creativity as committees usually muster, punch out a list of “strategies” that often look like this:

  • “We will grow revenues by X%”
  • “We will achieve a market share of X%”
  • “We will grow gross margins by X%”
  • “We will be an employer of choice”
  • “We will be a green, sustainable business and a good member of the community.”

These are not strategies. They are objectives. They are the ends, not the means.

Imagine if Eisenhower had declared that his strategy to win World War II was to win it.

As Rumelt writes, “ . . . most corporate strategic plans are simply three-year or five-year rolling budgets combined with market share projections. Calling a rolling budget of this type a “strategic plan” gives people false expectations that the exercise will somehow result in a coherent strategy.”

5.  The strategy doesn’t make hard choices

We have all seen strategy decks with long lists of “strategies” and initiatives.   Sometimes the lists are so long that they require fancy graphics to create some semblance of order or logic.

This, like the previous discussed theatrics around vission, makes the fatal mistake of over-estimating peoples’ attention spans.

But more importantly, these long lists reveal a leader’s inability to make difficult choices. I cannot possibly say it better than Rumelt, “ . . . the essential difficulty in creating strategy is not logical; it is choice itself. Strategy does not eliminate scarcity and its consequence—the necessity of choice. Strategy is scarcity’s child and to have a strategy, rather than vague aspirations, is to choose one path and eschew others”(the emphasis is mine.)

I once worked with a leader who would frequently make a speech about “the power of and instead of or!” We didn’t have to make difficult decisions, we just had to think positively and creatively about what was possible! This, that leader thought, was how you inspired people to do great things. You can guess how well that all turned out.

So we’ve identified the hallmarks of a bad strategy, but what characterizes a good strategy? You’ll have to read Rumelt’s book to find out.

You’re Spending Too Much Money With Google. Here’s Why.

I’m finally admitting to myself that I’m never going to land a cool job at Google. I’ve been sending singing telegrams to Larry for years (do you know how hard it is to come up with lyrics that rhyme with “Severts?”) and I’ve never received a single response. Can you believe that?

It’s okay, because I’m pretty sure I never had the right stuff for Google. First of all, I’m ancient by the company’s standards. I’m older than Sergey Brin. According to Silicon Valley lore, time didn’t start until Sergey was born, so I’m not sure what that makes me.

Second, I don’t live in the Bay Area. The Bay Area, if you haven’t heard, is where all the Smart People in the world live. Their success, they will be quick to tell you, is entirely a product of their merit. Luck plays no part. Just ask that PayPal guy whose name I can never remember—Peter something or other.   He travels the country telling us stupid people that we should try to be more like him.

As I have slowly clawed out of my deep depression over being old and stupid, I have realized that there’s an upside to this tragedy. I am now liberated! I can finally speak my mind about Google because I no longer have to worry about torpedoing my job prospects there.  So here it goes.

I don’t actually believe that all the Smart People live in the Bay Area, of course, but I can see why “Googlers” might think that. Why? Because the rest of us buy their Adwords keywords without using our brains, sending trainloads of unearned cash to Mountain View so that Googlers can continue to indulge in perks like ermine-lined commuting buses and break rooms full of free fois gras (from humanely-stuffed geese.)

WARNING: WHAT FOLLOWS IS A SOMEWHAT TECHNICAL SCREED ABOUT GOOGLE ADWORDS. IF YOU HAVE NO INTEREST IN SEARCH ADVERTISING, DIGITAL MARKETING, OR MARKETING IN GENERAL, YOU MAY WANT TO BAIL OUT HERE. YOU OTHERWISE RISK SACRIFICING A SMALL AMOUNT OF LIFE’S SWEET JOY AS YOU SLOG THROUGH THE REST OF THIS ARTICLE.

ROAS is really GROAS

Here’s the problem.   When digital marketing people bid for keywords, they keep score for themselves with something called ROAS, which stands for Return On Advertising Spending. This sounds very precise and very smart, which everybody who uses it will assure you it is. And it elegantly requires that you input only two numbers: how much you spent on your advertising (s), and how much revenue the advertising generated for you (r.) Simply divide r by s and voila! You now know exactly how effective your advertising is.

Ah, if only it were that easy. Instead, I am going to argue that ROAS is not very helpful, and that in some cases it is dangerously deceptive. Allow me to explain why.

It’s always obvious how much you spent on your advertising (s), but the revenue that spending generates (r) is often difficult to determine. How can that be? After all, you know exactly how many people clicked on the ads, and it’s usually quite easy to determine what they bought from you (let’s keep things simple and assume you only sell goods online—physical stores create all kinds of new measurement problems.) So what’s difficult about it?

The challenge is in determining what part of that revenue was truly incremental, and what part was going to come to you anyway. To do this, you must estimate your base case, or what some people might call your counterfactual. By this I mean what would have happened in a parallel world where you did not purchase the ad.

When you mention this concept to Google’s salespeople (or, to be fair, any salesperson from any digital agency or network), they will look at you like you’re speaking Klingon. Part of their confusion is probably real, as it appears that they don’t get asked this question very often. And part of it, I suspect, is feigned, for even the salespeople at Google are supposed to be Smart People.

A Smart Person might find this analogy useful. Let’s assume that you and I own a donut shop. One day, let’s say it’s a Tuesday, we decide we want to grow our business, so we hire a neighborhood kid to walk around in front of our store dressed up like a Bavarian Cream. How would we determine if our money was well spent?

Well, we know what we paid the kid (s). That’s easy. But how much extra revenue (r) was generated?  We certainly wouldn’t count all our revenues for the day. Instead, we would take today’s revenue and subtract our base case.   What’s the base case? How about Monday’s sales? Or better yet, our sales from Tuesday of last week (donut sales probably vary depending on the day of the week.)

As stupefyingly obvious as this seems, the ROAS metric does not do this. Instead, it will use the equivalent of all of Tuesday’s donut sales.

If you are a digital marketing person, I can already hear you saying, “No it doesn’t! It only measures the revenue coming in directly from paid search! Organic search is tracked separately!” It is technically true that these sources of traffic are tracked separately, but the ROAS math implicitly assumes that all the paid search volume you receive is new, that none of it was stolen from organic search. This is completely false. Invariably some of that traffic was diverted, and in those cases, your marketing spending was wasted.

So ROAS is improperly named. I would propose that it should instead be called GROAS (pronounced “gross!”), for Gross Return on Advertising Spending.

Try ROAST instead

The metric digital marketers should be using is something I call ROAST, for Return On Advertising Spending–True dat!  I know this name is terrible, but the acronym sounds yummy.

ROAST will never settle for (G)ROAS’s distortion of the truth. It will always insist on estimating a base case so that we will know with more certainty what our true return on investment is.

The first step in calculating ROAST is to parse your keywords into similar buckets or to analyze them individually. I know this sounds insane, especially to those of you who are running five-million-keyword campaigns, but you’re going to see in a minute why this is necessary (and why your automated software platform could be leading you down a rat hole.)

The second step is to take that keyword (or tranche of very similar keywords) and estimate the likelihood that a customer would have clicked on your organic listing anyway (had you never placed the ad.) Let’s call this percentage (b) (a value somewhere between 0% and 100%.)

How do you estimate this probability? I can think of at least two options:

  1. Take an educated guess.  A good, honest effort will be much better than the (G)ROAS assumption of zero; so don’t be too hard on yourself. If you sell donuts online, believe you have a 20% share of that market, and your organic listing is in second place, then 20% seems like a fair estimate for a keyword like “online donuts.” If you want to be conservative, go with 10%.
  2. Experiment.  This is what the Smart People at Google would do! They would turn off a particular campaign for a defined period of time (for a week, a day, or even an hour) and measure how much of that paid traffic seeped over into organic search.

The third step is to calculate ROAST with this simple formula: (r(1-b))/s. Or, if you already have the (G)ROAS, just multiply it by (1-b). Using this math, an estimated b of 20% will reduce a $10 (G)ROAS to an $8 ROAST.

The superiority of ROAST: an example

So what, you say. Whether I use ROAS, GROAS, or ROAST, it all seems the same to me. Well, all these terms are indeed identical as long as you assume that b is the same across every keyword. But this is most certainly not true.

To illustrate, let’s use the example of the donut shop again, but let’s now stipulate that we only sell donuts online. Let’s assume that one of the keywords we have purchased is “Jeff’s Donut Shop.” Google, our platform software, and our digital agency will all tell us we should buy this “branded” keyword because its (G)ROAS is very high. The (G)ROAS is so high, by the way, because the people typing that term into Google are very inclined to buy donuts from us, so they generate a lot of revenue after they click on our ad.

But certainly you would admit that somebody who has just typed “Jeff’s Donut Shop” into Google is on a very specific mission. They know about our donuts and want to find our web site. So as long as we are in first place in the organic listings (where we should be if Google has done its job properly, which it almost always does), the customer is highly likely to find our listing and click on it.

In this case, I would argue we should estimate b at 95% or more. Again, it would be better (and reasonably easy) to determine this by suspending and restarting the associated Adwords campaign, but this guess will suffice for now.

If we’re right about b being 95% and we insert that number into our ROAST formula, we will find that a very high (G)ROAS of $20 for “Jeff’s Donut Shop” will translate into a ROAST of $1. Yikes!

In contrast, let’s explore a keyword like “online donuts.” This is not a branded keyword and as such will have a lower (G)ROAS. People who type this term into the search box are less certain about where they are going to buy their donuts. They will probably look at several sites, and they may be completely unfamiliar with Jeff’s Donut Shop, so even if they click on our ad, they are much less likely to buy from us than the first group, so their (G)ROAS will be much lower. For the same reasons, these people are much less likely to click on our organic listing.

Consequently, for “online donuts,” I would roughly estimate b at 10%.   This will reduce a $2 (G)ROAS to a $1.80 ROAST.

The table below shows you the wildly divergent answers (G)ROAS and ROAST will give you in this example.

Keyword                                  (G)ROAS                ROAST

“Jeff’s Donut Shop”               $20.00                    $1.00

“Online donuts”                      $2.00                      $1.80

If you use (G)ROAS, “Jeff’s Donut Shop” is ten times more productive than “online donuts.”   If you refer instead to ROAST, the roles are reversed, and “online donuts” is 80% more effective than “Jeff’s Donut Shop.” I’m sure you’ll agree this is a remarkably different picture.

Key takeaways

I would encourage you to take away two things from all this. First, ROAST will always be lower than (G)ROAS. Your advertising on Google (or any other digital platform) is always less productive than the (G)ROAS says it is (assuming all your return is generated online) because (G)ROAS doesn’t account for the base case.

Second, (G)ROAS in most cases severely overestimates the return on branded terms. This leads to some very bad decision-making. Software platforms that optimize for (G)ROAS will buy up branded terms first, sending money to Google that should have stayed in your pocket. At one client of mine, the software was buying up the entire market for branded terms because it was so enamored of the terms’ high (G)ROAS. Meanwhile, the platform passed up many juicy non-branded terms—because the budget had been drained in the pointless pursuit of branded terms.

Digital marketers who are managing their campaigns manually will usually make the same mistake. Even if they understand that branded keywords are incomparable to non-branded, they will often add them to their mix to “increase their ROAS,” often at the behest of their agency or salesperson. This is absurd, but very common!

Anticipated objections

Defenders of the status quo will probably object to these arguments in the following ways:

  1. They will say everybody knows that branded keywords are different from non-branded. This is generally true, but digital marketers don’t appear to truly understand the implications of the differences, leading to the bad behaviors I’ve described.  Critics who defend using ROAS reveal that they don’t understand the implications either.
  2. They will say that smart marketers knowingly overpay for branded terms so that they can block out evil competitors. This is the line I would use if I were a Google salesperson. And I’m sure in some cases this is a legitimate threat. But certainly one should wait until that threat actually materializes before reacting to it. And if one does react, one should use the proper ROAST math to determine the right level of investment. Someone typing your company’s name into Google is unlikely to be easily swayed by a small text ad from your competitor.

Most of these objections from critics will be swathed in layers of industry mumbo jumbo with a dollop of condescension. Don’t be intimidated. Just ask them how they’re accounting for the base case.

 A final exercise

If you buy these arguments and are starting to feel like a sucker, please don’t. Some of the largest, most sophisticated advertisers in the country are guilty of this (G)ROAS obsession. Take a quick look at the big wireless carriers. If you type their names into Google, you will discover that they all place paid ads right on top of their organic listings.

You’ll also notice that none of these companies are buying ads for their competitors’ branded keywords. If these viciously competitive spendthrifts aren’t trying to steal branded keyword traffic from their mortal enemies, do you really think you have a lot to worry about with your competitors?

One final thing. I can’t help but notice that as of August 29th, 2015, the keyword “YouTube” generates no paid ads on Google (see the picture at the head of this article.) The same goes for “Google maps” and “Gmail.”

It appears that some Smart People at Google understand ROAST after all.

I Am Going to Give Away My Apple Watch

Dear Apple Designers,

I am thinking of giving my Apple Watch to Turner. Turner is my dog.

I am considering gifting the Watch to my dog because the blue band looks nice with his red coat (see picture above) and he will probably enjoy the Watch more than I do.

Before you dismiss me as an Apple-hating crank, know that your company and I have had a monogamous relationship (on my end, anyway) since about 2008. I am embarrassed to admit that my home currently contains two iMacs, one MacBook Air, two iPads, four iPhones, two Apple TVs, and an iPod carcass at the bottom of every dresser drawer.

I should love the Apple Watch, but ever since I bought my 38mm Sport model two months ago, my enthusiasm has waned faster than Scott Walker’s poll numbers.

This product, unlike nearly everything else you’ve designed in the last decade, is maddeningly complex and unintuitive.   Let me share just a few of my frustrations.

What do you mean I have to plug it in?

I know, I know, everything electronic has to be plugged in. I get it. But I’m not used to plugging in my watch. It’s been decades since I even had to wind my watch.

This means that I invariably forget to plug in the Watch. I only realize my error when the Watch dies or is about to, so I often have to take it off in the middle of the day and recharge it.

This wouldn’t be a problem for an ordinary watch, but some of the more interesting functions you’ve designed into the Watch require that I wear it continuously. Take all that health stuff, for example. Every time I go to take a quick 20K run, the Watch shows that it’s at twelve percent battery power or less, so I have to leave it behind while I’m out knocking down four-minute miles.   I then get no credit for all those steps. None at all.

Later that evening, the Watch will send me a perky message congratulating me on burning 307 calories for the day. 307 calories! Hell, I burned that many calories before breakfast!

This is very irritating. However, I am willing to admit that I am a bit of a curmudgeon, and that even I am capable of learning new habits. I intend to dedicate myself to learning to plug in the Watch every evening. But couldn’t you make it easier? Couldn’t you design an elegant pad or receptacle of some kind that would look great on my nightstand?   That little magnetized white disk you give us now is ridiculous. My electric toothbrush would be embarrassed to sit on that thing.

What do you mean I have to enter a passcode every time I put it on?

Why do you make me do this? The Watch knows that I’m me. It’s talking to my iPhone in my pocket!

If it’s not me, if somebody has managed to steal both my iPhone and my Watch, and if I haven’t figured out a way to disable the phone through your Find My iPhone app, then I’m probably dead. If that’s the case, I’m not worried about the Watch.

But maybe I’m wrong and your Apple lawyers are right. If we have to keep the Watch secure at all costs, then please allow me to do it in some way that doesn’t require that I use my fat finger to type on numbers smaller than banana seeds.

Wait, I have an idea! How about using my fingerprint? Wouldn’t that be cool? Do you think you guys could figure out a way to use some kind of whiz-bang sensor to recognize my fingerprint? I’m sure that’s impossible, the kind of tech you would only see in Flash Gordon, but maybe if you start working on it . . .

Finding and opening an app is harder than untying the Gordian Knot!

You can’t possibly expect me to find the app I’m looking for amongst that sea foam of app bubbles. And if I do find it by some miracle, I can never get the thing open easily. I sometimes forget my passcode frustrations and try hitting it with my finger, but you already know how that turns out.

So then I usually try that wheel thingy. First of all, that only works if I have somehow dragged my app victim to the center location on the screen, a task that requires a lace maker’s patience, as the Watch always wants to second-guess my efforts. And then, after I’ve finally centered the wandering app, I will inevitably spin the thingy in the wrong direction (Do I spin it up? Or is it down?), making the app disappear back into the sea foam.   Arrgghh!

When will these apps start helping me?  

I’m still waiting for an app on my watch to do something really cool.  I’m not sure what that would be, exactly, but here are a few top-of-mind thoughts:

How about a timely update on what’s going on in the world? The Dow dropped 1000 points yesterday morning and the Watch didn’t bother to tell me about it, even though I am loaded for bear with the New York Times, NPR, and BBC apps. I’m sure that getting that kind of alert is possible, and that I’m supposed to find the setting somewhere six menus deep on my iPhone that will allow such effrontery, but the Watch should already know that I use those three apps more than any other on my phone, and that I would welcome a little morsel of news once in a while.

Here’s another example. I rode my bike last weekend on a bike path in a forest reserve. Before I set out, I tried to use your workout app to understand what health benefits I would be accruing for all my hard work. After a few minutes of hitting the wrong buttons and falling into screen traps I couldn’t escape, I gave up.

But then I started to think, wait a second, there’s a computer in this Watch! Or in the iPhone it’s paired with, anyway. And a whole bunch of other cool technology too! Like GPS! So why can’t the Watch derive from my location and speed that I’m riding my bike? Why can’t it determine whether I’m riding on a gravel path or tarmac? Up a hill or down? Isn’t that information stored somewhere on the Internet? Couldn’t the Watch use those data and what it knows about my weight and fitness to automatically calculate the calories I burned? Couldn’t it send me an unexpected message at the end of the day, surprising me with that calculation?

Instead, it sends me a message saying I burned 307 calories.

I guess what I’m asking for is a watch that makes an effort to know me and proactively communicates the information I will find most relevant. I’m sure that’s hard, but is it any harder than creating the Mac in 1984? The iPhone in 2007?

What’s with the screen latency and unreliable gesture controls?

You’re not going to believe it, but the one task I’ve consistently burdened the Watch with is waking me up from my rare mid-afternoon naps. “Siri,” I say with careful enunciation and measured pace, “Please set a timer for twenty-five minutes.” And then I stretch out on the couch and nod off, comfortable in the knowledge that the Watch will wake me as requested.

Twenty-five minutes later, without fail, the Watch gently taps me on the wrist and emits a pleasingly soft sound of chiming bells. As I wade my way out of the mists of sleep, I twist my wrist over and up to my face so that I can dismiss the alarm.   The screen, normally so eager to illuminate, remains dark. I put my arm down to my waist and repeat the motion. Still dark. I try a third time. Nothing. I then sit up and flick my wrist yet again. The screen finally lights up, but just as I’m about to hit the “dismiss” button, it disappears. Desperate, I now hit the wheel thingy. The screen appears. I push the “dismiss” button. Nothing happens. I go to push the button again, but the screen goes dark once more. All the while the haptic feedback and the chiming continues, transforming now into a throbbing Chinese water torture of taps and ringing bells. How do I turn this thing off? Another wrist flip, another push of the wheel thingy, and the screen finally reappears. Ready for it this time, I move my finger to the screen in a flash. I hit the button. The chiming continues. I hit it, didn’t I? I push it again. The Watch finally succumbs.

I revel in the silence, fully awake, and completely enraged.

The Watch is far, far short of the brilliance I expect from you. It feels like a product that has been designed by committee, with little attempt to imagine how it would be used, and too much deference to reasonable expectations and compromise. You can do so much better.

Until then, the Watch will be Turner’s.